Adventures in Legal Outsourcing to India and Beyond

November 2010

November 24, 2010

Today's Economic Times reports that the Thomson Reuters acquisition of offshore legal outsourcing leader Pangea3 was valued at $100 million, "according to a person close to the development." Since the venture capital company Sequoia jointly owned 50% of Pangea3 at the time of Thomson's purchase of 100% of Pangea3's shares, with Sequoia having invested $7 million, Sequoia may have done very well indeed. “This is a fantastic exit for Sequoia as we have a complete cash deal,” reportedly said Sumir Chadha, the managing director of Sequoia Capital India. Here are some excerpts from the article:

Private equity major Sequoia Capital has recorded one of its most profitable exits and its fourth for the year with the sale of legal process outsourcing (LPO) firm, Pangea3. Global information services major Thomson Reuters bought the Mumbai-based firm on Friday last week and the deal was valued at $100 million, according to a person close to the development.

Sequoia Capital invested $7 million in Pangea3 in 2007, while another investor Glenrock Group put in over $4 million a year earlier. The two PE investors jointly owned 50% of the LPO firm set up by entrepreneur duo Sanjay Kamlani and David Perla.

“This is a fantastic exit for Sequoia as we have a complete cash deal,” said Sumir Chadha, managing director, Sequoia Capital India. The fund has seen three major exits this year including the public listing of SKS Microfinance and a partial exit from Dr Lal Path Labs. The fund also sold its entire stake in Manappuram Gold Finance through a public market sale.

* * *

"This was an M&A deal that came at the right time; we are a six-year-old firm and as with all VC-backed firms there is expectation of return for shareholders,” said Sanjay Kamlani, co-founder, Pangea3, who will continue to run the firm along with the existing team. "The management is committed to growing the business further," he said. Kamlani and Perla along with other employees owned the balance 50% of the firm that has a roster of big-ticket clients including top 250 law firms in USA.

November 23, 2010

No, the headline above is not a typo. In a Report and Discussion Draft announced today, the American Bar Association Commission on Ethics 20/20 has issued what amounts to a ringing endorsement of offshore legal process outsourcing, while making sure to say that it is not an endorsement. ("[t]he changes... recommended herein constitute neither endorsement nor rejection of the practice of outsourcing by lawyers and law firms.")

No doubt the above disclaimer is due to the backlash the ABA encountered from some free-lance contract attorneys and others two years ago, in response to the ABA Formal Ethics Opinion 08-451. In that Opinion, the ABA Standing Committee on Ethics and Professional Responsibility came right out and "saluted" the outsourcing of legal services. ("The outsourcing trend is a salutary one for our globalized economy.") In the 2008 Opinion, the ABA Committee went on to mention that "outsourcing affords lawyers the ability to reduce their costs and often the costs to the client," allowing law firms to better represent clients "effectively and efficiently." In the Committee's words, which apply to in-house counsel as well as law firms: "There is nothing unethical about a lawyer outsourcing legal and non-legal services, provided the outsourcing lawyer renders legal services to the client with the 'legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.'" (Quoting Model Rule 1.1.)

In the new Report and Discussion Draft, the ABA Commission proposes nothing that contradicts the 2008 Opinion. Instead, in the Report, the Commission further extolls the success, virtues, and "appeal" of legal outsourcing, while of course being careful not to "endorse" it. The Commission even goes so far as to rebut complaints that offshore legal process outsourcing inevitably results in ethical problems such as breach of confidentiality and conflicts of interest. Below are some relevant excerpts from the Commission's Report:

The outsourcing of work domestically and internationally, although not new to the legal profession, is becoming increasingly widespread. The ABA Standing Committee on Ethics and Professional Responsibility and other state and local bar associations have recognized the reality of outsourcing and issued many opinions or reports giving guidance on how to outsource ethically.2 ABA Formal Opinion 08-451, entitled “Lawyer’s Obligations When Outsourcing Legal and Nonlegal Support Services,” identified key ethical considerations lawyers should take into account under the Model Rules of Professional Conduct when outsourcing domestically or internationally. To date, however, the Model Rules and their accompanying Comments do not specifically address outsourcing.

* * *

The changes to the Comments to Rules 1.1, 5.3, and 5.5 of the Model Rules of Professional Conduct recommended herein constitute neither endorsement nor rejection of the practice of outsourcing by lawyers and law firms. Rather, they are an important and direct response to the existence and growth of outsourcing practices, intended to help lawyers engaging in the practice to do so ethically and responsibly.

* * *

Among the factors that have contributed to the significant growth of outsourcing are the technology-driven enhanced ability to provide cost-effective “24/7” service to clients and faster turnaround for labor-intensive projects; the enormous growth of electronic discovery; the dominance of the English language in law and commerce; and the steady escalation of legal fees.

For several reasons, outsourcing may appeal to the clients of U.S. lawyers and law firms as well as to the lawyers and law firms themselves. The work may be better done outside the firm because of efficiencies developed and utilized by providers of outsourced services. There are potential and possibly substantial cost-savings, whether the work is outsourced to providers in the U.S. or elsewhere. This cost differential may be of particular benefit to solo practitioners and small and medium-sized U.S. law firms, allowing them to compete more aggressively for large matters without fear that if they secure employment by the client they may lack adequate resources to perform the legal work.

* * *

Exploring the range of additional guidance currently available to lawyers, the Commission reviewed materials from domestic and international outsourcing providers themselves, finding substantial evidence that the providers are also focused on the ethical considerations and obligations identified in the organized bars’ ethics opinions, and that they are motivated to do so. Protocols developed by the providers of outsourced legal and non-legal services evidence their use of ever more sophisticated technology to ensure quality control of the outsourced work, to provide adequate security over personnel and information, and to increase the opportunities for and convenience of oversight by the lawyers and law firms that are outsourcing the work.

Information the Commission reviewed shows that, for example, a wide variety of effective procedures are in place to protect the confidentiality of client information. Lawyer and nonlawyer employees of many outsourcing providers are required to sign confidentiality agreements, with some firms requiring employees to sign new and separate confidentiality agreements for each new assignment. Although the details of security measures implemented by outsourcing companies are often proprietary, certain generalizations are possible. The most effective of these measures include the use of the most up-to-date information security technology (e.g., for encryption, anti-virus, transmission, storage, and permanent deletion of information); use of biometric and other security measures for access to premises or data (including separate premises or areas for each project); maintenance of continuous video monitoring, monitoring of employee computers, disabling of employee computers’ portals for portable data storage devices, and repeated identity checks on admission to buildings, elevators, and other areas where work is being performed; extensive background checks on employees; and periodic internal and external audits of all of the foregoing measures.

The Commission heard from a number of sources that conflict-of-interest considerations are increasingly given careful attention. For example, a number of outsourcing providers conduct conflicts checks modeled after those conducted by large U.S. and U.K. law firms; others are developing similar systems. These may include maintaining extensive data bases for existing and former clients and screening the work history of new recruits and existing employees against both the information contained in the data bases and information supplied by the client.

Industry awareness and responsiveness to the ethical concerns and obligations of U.S. lawyers and law firms are resulting in outsourcing firms seeking input from and collaboration with the organized bar, and with lawyers and law firms, in the development of ethics policies and training regimes for the lawyer and nonlawyer employees of service providers. The Commission’s research has determined that a number of companies that provide outsourced services have established sophisticated training programs for nonlawyer and lawyer employees on a variety of topics, including U.S. substantive and procedural law, legal research and writing, and the rules of professional ethics. There may also be specific training to address the particularized needs of a client or project.

Regarding the Commission's proposed changes to the Comments in the Model Rules, as suggested in today's Discussion Draft, again they do not depart from the ABA's previous Ethics Opinion. For example, here is the proposed new comment to Model Rule 1.1 on "Competence":

Retention of Other Lawyers

[7] A lawyer may retain other lawyers outside the lawyer’s own firm to provide or assist in the provision of legal services to a client provided the lawyer reasonably concludes that the other lawyers’ services will contribute to the competent and ethical representation of the client. The reasonableness of the conclusion will depend upon the circumstances, including: the education, experience and reputation of the nonfirm lawyers; the nature of the services assigned to the nonfirm lawyers; and the legal and ethical environment in which the services will be performed. When retaining lawyers and others outside the lawyer’s own firm, the requirements of Rule 5.5 (a) must be observed. When using the work of nonfirm lawyers in providing legal services to a client, a lawyer must also reasonably conclude that such work meets the standard of competence under this Rule. If information protected by Rule 1.6 will be disclosed to the nonfirm lawyers, informed client consent to such disclosure may be required. For example, if the rules, laws or practices of a foreign jurisdiction provide substantially less protection for confidential client information than that provided in this jurisdiction, the lawyer should obtain the client’s informed consent to such disclosure.

The Commission makes a similar, almost identical proposal for a new Comment to Model Rule 5.3 on "Responsibilities Regarding Nonlawyer Assistants."

“We’re in an outreach mode of soliciting public comment,” says Judge Kathryn A. Oberly, from the District of Columbia Court of Appeals, who chairs the Commission's outsourcing working group. “It’s a draft proposal, but we’re not wedded to it. The point of our draft is to get comments from anybody and everybody who wants to comment on it. We’ll see what people have to say.”

The Commission will receive comments through January. After that, the outsourcing working group will review its draft before preparing a final version for consideration by the full commission. Then, depending on the nature of the final recommendations, the House of Delegates may consider them. While the Commission has set no specific schedule, it expects to submit most of its recommendations for consideration by the House during 2012.

November 21, 2010

Infosys LPO, the offshore legal outsourcing arm of the legendary IT company, Infosys Technologies, is expanding from Pune, Bangalore and Gurgaon into Manila, where it plans to hire 50-100 employees for starters. This is according to a report in today's Hindu Business Line, by Moumita Bakshi Chatterjee. The reason given is the preference of some Infosys clients for The Philippines, where the legal system is perceived to be more similar to that of the United States, and where Infosys already has a presence:

“We will expand to Manila proactively. India has a large talent pool but the legal system in Manila is more aligned to the US system. Hence, some select clients are citing that as a preference. Also, Infosys BPO already has a large centre in Manila and we can leverage that for LPO operations,” said Mr Rahul Shah, Associate Vice-President, Principal – Knowledge Services, Infosys Technologies.

According to the article, Infosys LPO has grown to over 500 professionals, mostly in Pune, and the company is planning expansion not only to The Philippines, but also to onshore locations:

LPO engagements account for 60 per cent of the total knowledge services business of Infosys, with over 500 professionals and $15 million in annual revenue. Bulk of the work is done from Pune (about 400 professionals), followed by Bangalore (80-100 professionals) and Gurgaon (about 20 professionals).

Mr Shah said that Infosys, in certain cases, is also seeing demand for onsite delivery of LPO services. “The legal industry is fairly conservative. From cost or efficiency perspective, if a CFO has to push LPO, he may have to show that near-shore or onsite model is possible,” Mr Shah added.

Currently, the LPO service delivery is primarily offshore, with some client interfacing and sales professionals based onsite (in close proximity to client location). “But, there are clients who want to embed people onsite as part of service delivery, either due to the sensitive nature of work being outsourced or because of staff shortage at their end,” he said.

Given this, the company is now considering onsite presence within the US, a market that brings in nearly 70 per cent of Infosys' LPO revenue.

“In the next two years, we expect our US-based personnel to contribute 10 per cent of our overall delivery revenue,” he added.

The above news regarding Infosys highlights the fact that the Philippines apparently poses the biggest competition to India in relation to legal outsourcing services. The Philippines, like India, has thousands of English-speaking lawyers who can offer their services at a fraction of the cost of what US lawyers provide. Also, the Filipino legal system borrows much from that of the US. American lawyers not only created the country's legal system, but also founded the key law firms and the top law schools there. The Philippines law school curriculum is also patterned after that of US law schools.

Despite all that, the fact remains that law schools, whether in the US, India, or The Philippines, for the most part do not train their students to perform legal work. Similarly, experience in the legal system of a foreign country, even in the Philippines, does not always equate to better preparation for performing LPO or legal KPO (knowledge process outsourcing) services for US clients. It can even be a detriment, as applicants with "experience" often come with "attitude" as well. They sometimes need to "unlearn," as much as learn. Often, the key attributes of successful offshore legal outsourcing recruits involve intelligence, aptitude, ambition, eagerness to learn, command over the English language, and low cost of living. Given those factors, plus the vastness of the Indian talent pool, India still seems to have the edge.

November 19, 2010

One thing that the legal, financial, educational, and news information giant, Thomson Reuters, has not been accused of is ignorance. Given that this multi-billion-dollar company announced yesterday that it has acquired 100% of the shares of Indian legal outsourcing provider Pangea3, after also recently deciding, for "strategic" reasons, to sell its profitable and high-profile U.S. bar exam preparation course (BAR/BRI), you can assume that some very smart money is betting on a tectonic shift in the Western legal landscape.

Did you politely nod along in conversations about India and “legal processing outsourcing,” all the while thinking that it was just a fad? That U.S. law firms would ultimately somehow win back the work by figuring out how to do it better, faster, cheaper?

Well, the news that data and information giant Thomson Reuters is buying Pangea3 should extinguish some of that lingering skepticism.

If there are any lawyers in Canada that seriously think that the legal world will remain unchanged, you better hope that they’re not managing your firm, nor your law society.

Pangea3, one of the largest and perhaps better known LPOs in the world has just been gobbled up by Thomson Reuters and will be seeking even greater expansion into legal services worldwide. Note: if those who run your law society, or your firm, don’t know what an LPO is, you’re in even greater trouble.

This is a legal earthquake equivalent to 10.0 on the Richter scale; the world’s largest legal information company acquiring the world’s largest LPO.

Law firms and regulatory bodies better have a well thought-out business answer to this – other than the typical, unthinking ring fencing response that will ultimately prove to be the demise of lawyers.

It is well past time to face the fact that law is a business. And we better start acting like businesses, or soon, we’ll all be “out of business.”

Hang onto your hats, your legal world is about to get rocked.... So Thomson wants out of the “preparing American attorneys” market, and in on the legal outsourcing market in India. ARE YOU SERIOUS? Now go back and read the BAR/BRI email, especially this line: “Our parent company believes, however, that bar preparation no longer fits its long-term strategic vision.” That can’t be good. That simply cannot be a good sign that Thomson evidently thinks there is more money to be made from Indian lawyers doing American legal work than from training American lawyers to do American legal work.

LegalWeek magazine opines that "[t]he entry of Thomson into the LPO market will be viewed as evidence of the high expectations being placed on the model to shake up the commercial legal market."

Offshore legal outsourcing, or legal process outsourcing (LPO), or legal KPO (knowledge process outsourcing), or whatever you want to call it, has been generating both media hype and actual substance for years. But this latest development represents a serious, objective, outside validation.

Congratulations are due to Sanjay Kamlani, David Perla, and the rest of the Pangea3 team, for being the most successful pioneers in this still nascent industry. When they started their company in 2004, employees reportedly were sitting elbow-to-elbow in a less than savory office in Mumbai, making cold calls to the U.S. in a search for business. More recently, Pangea3 has attracted the creme-de-la-creme of Western corporations and law firms, and it's staff now work in gleaming, multi-million-dollar-funded offices in posh neighborhoods. Many of them have (or we should say, had) shares in the company, such that now they are cashing in, and deservedly so.

Pangea3 has been an inspiration to countless other LPO companies that have followed in its wake, even if not all of them have followed its model of pursuing high-volume document review. Pangea3 is among four legal outsourcing companies (along with American Discovery, SDD Global Solutions, and UnitedLex) that recently were ranked among the top 50 outsourcing companies in the world, ahead of over 2,700 other players, according to the 2010 survey of 6,547 clients by the Black Book of Outsourcing.

Regarding the Thomson Reuters deal, we want to reiterate that for Western law firms, this is a wake-up call, but not a death-knell. It is worth repeating that legal process outsourcing does not threaten the existence of U.S. (or U.K.) law firms. Unless you want to define Western law firms as inherently dinosaur-like, and incapable of changing to avoid extinction. The threat is not to law firms themselves, but to an outmoded model of law practice that clients increasingly will not tolerate. We are witnessing the start of a positive, paradigm shift in the way that legal services will be delivered in the West.

Several law firms are embracing the change, and reaping rewards from it. Those firms are receiving more assignments and more client revenue, not less. This is coming in part from (a) existing clients who send them “elective” legal work that otherwise would never be performed, due to cost, but which is not a problem when Western lawyers are paid to supervise and edit the work of attorneys in India, and (b) new clients who come to those law firms only because of their reputation for developing an alternative to the old model.

So there is no need to start making funeral arrangements for the Western legal industry. Forward-thinking law firms will adapt, embrace off-shore legal outsourcing, and learn how to make it serve not only the interests of their clients, but their own.

November 18, 2010

Its official. The following is today's announcement from Thomson Reuters:

NEW YORK and MUMBAI, India, Nov. 18, 2010 -- /PRNewswire/ --Thomson Reuters, the world's leading source of intelligent information for businesses and professionals, today announced that it has acquired Pangea3, a fast-growing legal process outsourcing (LPO) provider serving corporate legal departments and law firms worldwide. Terms of the deal were not disclosed.

The acquisition extends the Thomson Reuters strategy to develop world-class information, software and workflow solutions for legal professionals around the world. Pangea3 is headquartered in New York and Mumbai, India, and has 650 employees at its major delivery centers in Mumbai and New Delhi. Pangea3's client base includes Am Law 250 law firms and some of the world's largest financial services, pharmaceutical, healthcare, food and beverage, technology and consumer goods companies. The firm offers a variety of services organized into four distinct lines of business including legal document review; corporate transactions; intellectual property; and risk management and compliance.

Peter Warwick, president and chief executive officer of Thomson Reuters, Legal, said legal process outsourcing adds a vital strategic complement to the Thomson Reuters portfolio of specialized information and workflow solutions, and will be key to helping law firms and corporate legal departments be more responsive and cost-effective. "Pangea3 is true to our mission to help the legal system perform better, every day, worldwide; we will now bring to the legal marketplace a responsive, high-quality, transformative resource for a broad range of legal support work. This is particularly important as law firms and general counsel adjust to the realities of the 'new normal,' where efficiency, quality and responsiveness are paramount," he noted.

Pangea3 is seen as the world standard in the LPO marketplace, which is growing at more than 20 percent annually and projected to exceed U.S. $1 billion this year.

"The addition of Pangea3 to the Thomson Reuters family creates a solid foundation in the global solutions suite that is a perfect fit in our long-term growth strategy," said Tony Abena, president and general manager, Global Legal Solutions. "With overlays in key segments including our Corporate General Counsel, IP Solutions, Governance, Risk and Compliance and Law Firm businesses, we're aligning ourselves more closely into general counsel and law firm workflows. Pangea3 brings to Thomson Reuters a broad and rapidly growing client base, and a reputation that is unmatched in the LPO marketplace. I'm very pleased to welcome the Pangea3 team to Thomson Reuters."

"Joining forces with Thomson Reuters will further accelerate and expand our ability to provide impactful and transformative solutions to our corporate and law firm clients," said David Perla and Sanjay Kamlani, co-CEOs of Pangea3. "Thomson Reuters is the perfect partner for Pangea3's clients and team-members to continue to grow and solve the increasingly complex and expensive challenges facing legal professionals around the globe."

"Pangea3 has been a valued provider for me, and is an attractive alternative for my clients," said Jeff Jaeckel, a partner at Morrison & Foerster and head of Morrison & Foerster's Washington, D.C. and Virginia Litigation Department. "We look forward to even bigger and better solutions as Pangea3 joins forces with Thomson Reuters."

Founded in 2004 by Perla, formerly Monster.com vice president, Business & Legal Affairs, and Kamlani, who was OfficeTiger CFO and general counsel, Pangea3's team of top-tier legal talent uses rigorous Six Sigma methodologies to ensure high-quality legal services. Perla and Kamlani will continue in their current roles, and all 650 Pangea3 employees will join Thomson Reuters, remaining based in their New York, Mumbai and New Delhi offices. For more information, visit http://www.pangea3.com.

About Thomson Reuters

Thomson Reuters is the world's leading source of intelligent information for businesses and professionals. We combine industry expertise with innovative technology to deliver critical information to leading decision makers in the financial, legal, tax and accounting, healthcare and science and media markets, powered by the world's most trusted news organization. With headquarters in New York and major operations in London and Eagan, Minnesota, Thomson Reuters employs 55,000 people and operates in over 100 countries. Thomson Reuters shares are listed on the Toronto and New York Stock Exchanges. For more information, go to www.thomsonreuters.com.

In yet another consolidation exercise, financial news and business information provider Thomson Reuters is all set to acquire legal process outsourcing firm Pangea3. The deal is expected to be formally announced in the next one or two days, said sources. The total deal value could be in the range of $35-40 million (around Rs 157-200 crore).

This is the second acquisition by Thomson Reuters in India. Pangea3, founded by David Perla and Sanjay Kamlani, has private equity investment from The Glenrock Group and Sequoia Capital. The company is expected to have an annual revenue of $25-30 million.

“Pangea3 will be making an official statement to its employees tomorrow,” said a source close to the deal. The Glenrock Group had led an invested of $4 million in 2006 and Sequoia Capital invested $7 million in 2007.

When contacted, Sanjay Kamlani, the co-CEO of Pangea3 said: “Every second month there is speculation that either we are acquiring some company or someone else is acquiring us. We have never commented on such speculation and I will not comment on this news either.”

Pangea3, which has over 650 employees, offers services like patent analytics and patent prosecution services, legal research, business and competitive intelligence services, commercial contracting and licensing services among others.

For Thomson Reuters, the acquisition fits into its legal services offering. Other than the financial news and business information services, the firm also has a presence in the healthcare and science, legal and tax and accounting segments. This acquisition will fit into the Thomson Reuters legal business unit, which has a revenue of $3.6 billion and has 14,300 legal experts globally.

When contacted, Thomson Reuters said: “We do no comment on merger and acquisition activity.” Meanwhile, Tarun Anand, Managing Director and Senior Company Officer, South Asia, said the company was looking at the inorganic growth route in India. “We have earlier acquired Indlaw Communications. So the inorganic route is clearly an opportunity for us. We would look at acquiring in the legal space as well as in the healthcare and science space,” said Anand at a press conference held on the launch of its new financial desktop platform.

Thomson Reuters has about 8,400 employees in India. At present, in India almost 90 per cent of the firm’s business comes from its financial and business information segment.

The LPO segment is one of the fastest growing sub-sectors in the knowledge process outsourcing (KPO) domain. Revenue growth between 2010 and 2015 is expected to be approximately 26 per cent annually. Currently, there are over 5,200 professionals in the LPO industry in India and the Philippines, contributing an annual revenue of approximately $300 million (around Rs 1,362 crore), and this is expected to reach 18,000 professionals with an annual revenue of $960 million (around Rs 4,320 crore) by December 2015, said a report by Evalueserve.

November 16, 2010

The widely read and debated New York Times article last August on the subject of offshore legal outsourcing ("Outsourcing to India Draws Western Lawyers") led to a litany of comments from veteran U.S. lawyers saying essentially that the sky is falling. In particular, one of the most frequent complaints was that the sending of document review assignments to offshore legal process outsourcing (LPO) companies deprives young Western lawyers of crucial training opportunities. Below are excerpts from a few of those many comments:

"Document review is essential training for any corporate lawyer or litigator...."

"Denying American and British associates the opportunities to engage in meaningful document review will only produce third-rate senior lawyers."

"The whole point of having Junior Associates do the grunt work is to train them and make them experts."

"Isn't that grunt work done by young lawyers how they learn to be good lawyers?

Now, at least one partner at a major Western law firm has gone public with the truth on this subject. ALB Legal News reports that Tony Denholder, a partner at the top tier Australian law firm, Blake Dawson, said the following at last week's Australian Corporate Lawyers Association (ACLA) conference: "I think it is very naive to think that lawyers can't learn unless they are snowed under with repetitive, low level legal work."

Perhaps Mr. Denholder used the word, "naive," with reference to inexperienced persons who might believe that the above-quoted complaints are anything other than attempts to justify the extremely lucrative "pyramid system." This is the money-making machine that the General Counsel of Cisco Systems famously described as "the last vestige of the medieval guild system to survive into the 21st century." Under the law firm pyramid structure, corporate clients traditionally have been asked to pay a king's ransom for massive hourly billing by an army of junior associates at the bottom, who do not know what they are doing, and who, as a result, conveniently bill more hours.

As any candid veteran of large law firms could report, no serious legal training of young associates takes place while they are stuck in a room with boxes of documents, or in front of a computer screen with thousands of pages of mostly meaningless discovery material flashing before their eyes. If any senior lawyer wants to provide a meaningful opportunity for young associates to grow, he or she can train them how to do deals, how to argue in court, how to supervise cases, and how to provide legal advice. None of those things can be done for U.S. or U.K. clients by legal outsourcing companies in India, the Philippines, or anywhere else.

November 11, 2010

For years, experts on the legal process outsourcing industry have been predicting a consolidation in the number of LPO players, as the offshore legal outsourcing industry matures. Over a year ago, Rahul Jindal reported in his pathbreaking "Legal Process Outsourcing" blog that a variety of deals and acquisitions had already occurred, but that they were leading to an increase in the number of legal outsourcing companies, not a decrease:

The LPO industry has in a span of few years seen major mergers and acquisitions, partnerships and alliances. The first acquisition happened when Mysore-based Software Paradigms International (SPI) India acquired the entire BPO/LPO clientele of Comat Technologies across the US and UK, which was served by Comat’s Mysore-based operations. Such deals are indicative of the pace of growth of the industry. Gavin Birer in his article “Recession” “Depression” Unemployment” “Meltdown” “Crisis” … wrote “The IT industry took 13 years to come to maturity, BPOs took half a decade and now LPOs are emerging in a big way.” Even magic circle firms like Clifford Chance are taking interest in doing business in the Indian subcontinent. Established LPOs including Pangea3, Jurimatrix and SDD Global have attracted a significant level of private equity and venture capital. Big players like CPA Global have entered into strategic alliances to further enhance their products thereby giving an edge to their services. In 2008, CPA Global entered into an alliance with major electronic discovery software provider Applied Discovery Inc., a division of Lexis Nexis. The relationship ensures that CPA’s clients around the world benefit from a total review and e-discovery solution. Such tie-ups have played an instrumental role in making LPO a fast growing business. Recently UnitedLex entered into an alliance with Huron Consulting Group as well as Ocean Tomo, thus further enhancing and enriching the quality of their services and expanding their market. In terms of mergers and acquisitions, in 2008, Integreon acquired Datum Legal. CPA Global in the same year acquired SVPG to strengthen formers’ presence in German market. In short, business deals in the LPO space has made the industry grow from few vendors to more than 100 within a remarkable short period of time.

Today, however, comes news that one LPO is buying another LPO, which seems to be the first high-profile example of actual consolidation, rather than growth or proliferation. Below is today's press release from UnitedLex, recently ranked as one of the top four outsourcing companies in the world (along with two other legal outsourcing vendors, namely, Philippines-based American Discovery and India-based SDD Global Solutions), out of over 2,700 companies evaluated in the 2010 Black Book of Outsourcing satisfaction survey of 6,547 clients:

OVERLAND PARK, Kan. - (BUSINESS WIRE) - UnitedLex, a global full service provider of technology powered legal and business solutions, today announced that it has successfully completed the acquisition of LawScribe, a leading Legal Process Outsourcing company based in Los Angeles, California.

Founded in 2004, LawScribe provides legal services in eDiscovery and document review, intellectual property, corporate transactions, legal research and support. With offices in Los Angeles, New York, and Gurgaon, India, LawScribe serves Am Law 100 law firms, Fortune 500 companies and national legal organizations around the globe.

LawScribe has been recognized as an industry leader, delivering consistently high quality, cost effective legal support services. With LawScribe's deep domain capabilities and tradition of thought leadership, UnitedLex will expand its insight and applications to reduce costs and solve complex legal and business challenges.

"UnitedLex's industry leading technology and long standing commitment to multi-shore delivery made our decision to join them an easy one," said Kunoor Chopra, President and CEO of LawScribe. "This acquisition enables us to extend our service lines and further address market demands. Our clients will benefit from the combined scale and strength of our companies and UnitedLex's culture that attracts the industry's most experienced and sought after professionals."

About UnitedLex

UnitedLex (www.unitedlex.com) is a global leader in providing technology powered legal and business solutions. We deliver success in the fields of litigation, electronic data discovery, document review, contract review and management, intellectual property, immigration and law firm support. Leveraging more than 650 professionals in seven global offices and two data centers, UnitedLex empowers leading global corporations and law firms by providing them with the insight and applications to reduce costs and solve complex legal and business challenges. Our solutions approach has been carefully crafted to take advantage of our unique combination of strategic insight, deep industry expertise and technology.

November 08, 2010

A recent PricewaterhouseCoopers survey indicates that a quarter of the top UK law firms are turning to legal process outsourcing, as income for UK law firms in general has gone into free fall. Most UK law firms have seen lower revenues in the last year, driven by downward client pressure on pricing, together with a general contraction in the world market for legal services, according to PwC's 2010 law firms' survey.

In response to the decline in revenues resulting from the Western economic recession, many firms have turned to offshore legal outsourcing (LPO) and other cost reduction and restructuring programmes as a way to preserve profitability. The firms ranked 11-25 have seen the greatest pressure on revenues, the survey finds.

The survey indicates that the top 10 firms have benefited from scale and reach. The 11-25 tier, however, has continued to experience difficult market conditions. Outside the Top 25, a number of successful niche practices have emerged within the 26-50 ranking, with 5% of these firms reporting growth in fee income of between 11% and 15%.

Alistair Rose, partner and leader of the PwC professional partnerships advisory group, commented as follows:

"As in 2009, Top 11-25 firms have been under continued pressure on profitability. Despite an 8% reduction in their partner numbers and a 6% reduction in fee earner numbers, average profit per equity partner (PEP) still fell by nearly 1% to £441,000. This follows a 28% reduction in PEP in 2009. While our survey shows the Top 10 maintaining their breakaway position, it's worth noting that their average profit per partner is still some 17% lower than PEP in 2008.

"With a focus on cost reduction in 2010, it is not surprising that headcount reductions have been made by most firms. There is a notable difference, however, in the reduction in fee earner numbers, with the Top 10 scaling back by, on average, 6% compared to the 10% average reduction for the 11-25 firms."

The PwC survey suggests that support staff levels have been reduced in greater proportion than those for fee earners, supported in part by greater use of offshore outsourcing. Over the last two years, support staff numbers have been reduced by, on average, 25% in both the Top 10 and Top 11-25 firms.

"With the sustained market and financial pressure, it is perhaps not surprising that the number of Top 11-25 firms predicting mergers as 'fairly likely' in the next two to three years has risen from half of those firms in 2009 to 83% in 2010," Rose added.

The survey notes how partnership financing recently has received much attention. Recent concerns over the availability and cost of bank funding to law firms appear to have been over-stated as, in aggregate, the level of bank funding to law firms has increased. However, the increase in the level of external financing is of note, particularly in view of recent high profile law firm failures. While Top 10 firms and those ranked 26-50 are opoerating at relatively conservative levels of external funding (26% and 33% respectively of total funding), it is again the 11-25 firms where the numbers are at their starkest (40% external financing, an increase of 13% from 2009).

The decline in headcount, together with other cost reduction steps, have resulted in a substantially lower cost base for many firms. Outsourcing of various processes continues to rise, and many firms envision more outsourcing measures in 2011 and beyond, particularly IT, accounting and HR. Regarding legal process outsourcing ( LPO ), the top 10 firms are leading the way. 25% of them already taken steps in this direction, with Asia, the Far East and Southern Africa the favored destinations.

PwC's Alistair Rose concludes as follows:

"Looking ahead, it appears the legal sector is approaching a tipping point. Many of the larger Top 10 firms have used the recent economic difficulties to focus on making their businesses more efficient and have taken innovative approaches to both back-office support and how they provide legal services. There is further to go, however, and firms acknowledge there is still a significant information gap in their understanding of clients' preferences and needs.

"There is ongoing pressure on firms ranked 11-25 and it is inevitable that a number will need to consider their response to ongoing, difficult market conditions, client pricing pressures and new entrants to the market."

November 04, 2010

I normally write on topics related to legal outsourcing ("LPO"), but like most Indians right now, I am thinking about corruption. The events leading to the recently concluded Commonwealth Games hogged headlines for all the wrong reasons. Almost every newspaper and Indian television news channel vied with each other to air “breaking news” that invariably related to the corruption involved in organizing the Games. Some of the controversies that shocked the collective conscience of the Indian public were:

Allegations that Mr. Sanjay Mahendroo, a member of the Sports Ministry, sent an e-mail dictating taxi rates to a vendor in London who was hired to provide cars and other services during the Queen's Baton Relay function in London last year. Mahendroo is said to have instructed the vendor to charge 450 pounds a day for each taxi, an exorbitant rate even when compared to hiring a BMW or Mercedes with a driver in London. (Incidentally, the same company was hiring out a Mercedes S Class for 150 pounds a day.)

Allegations that Australian based Sports Marketing and Management (“SMAM”), which was engaged for roping in sponsors for the Games, was paid 23 percent commission on all sponsorship deals that were signed, irrespective of SMAM's involvement in roping in the sponsors.

Allegations that the Organizing Committee paid Rs. 1,20,000 ($2,666) for each lamp post, which were not worth more than a few thousand rupees.

Allegations that the Organizing Committee paid Rs. 975,000 ($21,666) to rent a treadmill for 45 days, when the cost of the treadmill itself is less than Rs. 100,000 ($2,200).

Allegations that the government spent Rs. 971 crores (Rs. 9,710 million) on renovating the Jawaharlal Nehru stadium, when the cost of cost of construction of one stadium itself is about Rs. 81 crores (Rs. 810 million).

Allegations that the cost of the Games is close to £4.2 billion pounds, which is 100 times more than the initial estimate of £42 million.

Reading the above stories made the average Indian sick in the stomach. Are we so helpless that nothing can be done, other than rant about how corrupt our politicians are? Should the common man continue to be a mute spectator to the brazen corrupt practices by our “honorable” politicians and civil servants?

In India, the Prevention of Corruption Act, 1988 (“PCA”) is enforced by the Central Bureau of Investigation, the Central Vigilance Commission, state anti-corruption bureaus, and state vigilance commissions. The PCA is a penal legislation and does not provide for any form of public participation in the process of curbing corruption. Certain states also have the LokAyukta, an institution that helps expose corruption, mainly among the politicians and officers in the government service. Sadly, the LokAyuktas do not have binding powers to punish anyone. They can only recommend punishment, and their recommendations are rarely acted upon. Described as “watchdog[s] without teeth,” the Lokayuktas have so far not proved effective in checking corrupt practices.[1]

Given the present state of affairs, sadly, there is nothing much than an average citizen can do. While media houses expose corrupt practices and public-minded citizens file the occasional public interest litigation, invariably all such attempts die a natural death and are soon forgotten, or are overshadowed by newer instances of corruption of even more alarming proportions.

All this can change, and drastically too, if India chooses to pass a law on the lines of the [Federal] False Claims Act (“FCA” also known as the Qui Tam law)[2] prevalent in the United States.

At the macro level, the scheme of the FCA Act is simple. The FCA is aimed at fighting fraud against the United States government. The FCA creates civil liability for any person who “knowingly presents, or causes to be presented . . . a false or fraudulent claim for payment or approval” by the United States.[3] The defendant can be made liable for treble damages and a civil penalty of up to $10,000 per claim.[4] A private person (referred to as a “relator”) may bring a FCA claim (also known as a “qui tam complaint”) “for the person and for the United States Government . . . in the name of the Government.”[5] A qui tam complaint is filed in camera and remains under seal for at least sixty days.[6] During this period, the relator must present all material evidence to the government, and the government investigates and decides whether to intervene and proceed with the action itself.[7] If the government takes over the case, the relator may receive between 15 and 25 per cent of the government’s recovery, depending on the extent to which the relator contributed to the prosecution of the action, plus reasonable expenses.[8] If the government declines to intervene, the relator may proceed with the action on his or her own.[9] If successful after the government has declined, the relator can receive between 25 and 30 per cent of any recovery obtained, plus reasonable expenses.[10]

Additionally, certain states too have their own qui tam laws to check fraud upon the state government. States with False Claims Acts include: California, Delaware, the District of Columbia, Florida, Hawaii, Illinois, Louisiana, Massachusetts, Nevada, New Mexico, Tennessee, Texas, and Virginia.[11]

To the author's knowledge, there is no analogous law in India. This however has not deterred private initiatives to curb corruption. Tata Tea's “Jagore” campaign is well-publicized and immediately springs to mind. There are also instances of public-spirited citizens who relentlessly fight lone battles in seemingly David v. Goliath situations.[12] In fact, one entrepreneur lawyer, Mr. Shaffi Mather, has also advocated a “for profit” initiative to fight corruption.[13] Under this model, Mr. Mather envisages a business model where entities can be set up to fight corruption on payment of a fee (which, Mr. Mather asserts, will be lower than the bribe demanded). While Mr. Mather supports his idea with 42 success stories, it is still unfair for the victim to pay a third party to fight corruption. Also, Mr. Mather's idea does not address situations where the corruption results in both the sides benefiting at the cost of the taxpayer (for example, the scams pertaining to the recently concluded Commonwealth Games, where substandard equipment was supplied at inflated costs, and there were no “victims” other than India at large, because seemingly both the supplier and the decision maker on behalf of the government benefitted).

All said and done, none of the private initiatives mentioned above have statutory backing. This is where passing a Qui Tam law can provide a major impetus to private efforts to curb corruption. Statutorily empowering the common man to initiate claims on behalf of the government, and incentivising him in case of a successful claim will go a long way in providing checks and balances to ensure that those involved in corrupt practices actually pay for it. An effective qui tam law would help check fraud, not just upon the government, but also curb corrupt practices by government officials. It is unlikely that fraud upon the government can be committed without the active participation or connivance of someone within the government itself. Making government officers civilly liable for the frauds committed on the government is likely to curb kickbacks and procurement fraud, of the nature that have been alleged against the Organizing Committee of the recently concluded Commonwealth Games.

Some of the more common types of fraud against the government that can be curbed by passing a potent qui tam statute in India are:

Double billing - Charging more than once for the same goods or service.

Phantom employees and doctored time slips: Charging for employees that were not actually on the job, or billing for made-up hours in order to maximize reimbursements.

Pumping, mining or harvesting more natural resources from public lands than is actually reported to the government.

Being over-paid by the government for sale of a good or service, and then not reporting that overpayment.

Misrepresenting the value of imported goods or their country of origin for tariff purposes.

False certification that a contract falls within certain guidelines.

Billing in order to increase revenue instead of billing to reflect actual work performed.

Failing to report known product defects in order to be able to continue to sell or bill the government for the product.

Winning a contract through kickbacks or bribes.

Encouraging and empowering public participation is the key here. The sustenance and success of efforts to combat corruption are directly related to the extent of participation of civil society. The average citizen is indeed a stakeholder and the ultimate victim of corruption. Passing a civil anti-fraud statute and providing incentives to whistle blowers to initiate private actions (on behalf of the government) should go a long way in curtailing corruption at the governmental level. The strongest prerequisite for passing such a law in India is political will.

------------------------------

* Sanjay Bhatia is Head of Operations at SDD Global Solutions, India's leading high-end provider of legal outsourcing services, and the only Indian legal outsourcing company managed by a U.S. law firm. He is also a regular contributor to the Law Without Borders blog on the topic of legal outsourcing, and he is a graduate of India's top-ranked National Law School. SDD Global has offices in Mysore, Bangalore, New York, and London. SDD Global recently ranked as the #1 outsourcing company in India, and #2 in the world, out of over 2,700 companies evaluated, according to the 2010 survey of 6,547 clients by the Black Book of Outsourcing.

[12] E.g., see shttp://www.legallyindia.com/20100121412/The-Bar-and-Bench/pil-vs-mining-giants-to-make-karnataka-rich, for story about Mr. Arun Agrawal's public interest petition presently pending before the Karnataka High court, where Mr. Agrawal alleges that mining companies like Arcelor Mittal and Posco will benefit unfairly from state concessions, causing a loss of $50 billion to the Karnataka Government.